Notify FTB after a federal tax adjustment
Has the IRS examined your client's federal return? Do you need information about the requirements for notifying California after federal tax adjustments are made? Did you know that we will compute your client's additional California tax liability if they provide the necessary information? Here's how to avoid common errors when notifying us of a federal audit.
Individual taxpayers are required to notify FTB if the IRS examines their federal return and makes adjustments that increase California tax for any year. In some cases the California tax change will be in a different tax year than the federal change due to differences in California and federal law.
Corporate taxpayers are required to report all changes or corrections to gross income or deductions, even if the changes or corrections do not result in an increase in tax payable to California for any year.
Taxpayers, individual and corporate, are required to notify us within six months of each final federal determination. A federal determination is final the date each IRS examination adjustment or resolution is assessed.
Statute of limitations
The statute of limitations for issuing assessments or refunds based on a federal examination is generally later than the normal statute of limitations.
When federal changes mean a California tax liability
- If the federal changes increase your client's income, resulting in a California tax liability, and we are notified within six months of the final federal determination, the statute of limitations is two years following the timely notification of the final federal determination.
- If we are notified after six months, the statute of limitations is four years.
- If we are not notified, the statute remains "open."
When federal changes mean a California refund
If the federal changes decrease income, resulting in a California tax refund, your client must file a claim for refund, normally within two years of the final federal determination.
What constitutes notification?
- Filing an amended tax return to notify us.
- Mailing or faxing a copy of all federal information.
If you provide us with sufficiently detailed information, we will compute the additional California tax liability or refund.
For complete notification responsibilities to California, see FTB Publication 1008.
Avoiding common errors
When you notify us of a federal audit examination, double-check the following items to avoid errors that may delay processing amended returns and claims for refunds:
Mark "Yes" under "federal audit"
When your client files a California amended return based on a federal examination, make sure to indicate "Yes" for the question "Have you been advised your original federal return has been, is being, or will be audited?" (Individual taxpayers), or "Is this amended return based on a final federal determination?" (Corporate taxpayers.) Marking the box ensures the return is routed to the correct office within FTB.
Include IRS documentation
When filing an amended return based on a federal examination, include complete federal documentation with the original examination report, revised examination reports, and settlement reports. When we receive incomplete documentation, we have to request the missing information from the IRS, which slows down the process.
Give a complete explanation
If there are differences between the federal and California adjustments, providing a complete explanation of the different tax treatments will minimize the number of contacts from us to request additional information.
Use correct starting amounts
If filing an amended return, enter amounts in Column A from the original return, the return information notice, or the notice of proposed assessment. Using the correct starting amounts keeps us from issuing an additional tax assessment or delaying your refund.
Apply correct phase-outs
Individual taxpayers that have a change in federal adjusted gross income should generally calculate the phase-outs for exemptions and itemized deductions differently for California. A change in federal alternative minimum tax will normally result in a change in California alternative minimum tax. Applying the correct California adjustments keeps us from issuing an additional tax assessment.
When filing an amended return based on a federal examination, include the same penalties applied in the federal audit to prevent us from issuing an additional tax assessment.
Do not submit duplicate amended returns
If filing an amended return, do not file a duplicate amended return - it will only delay our processing of the return.
Write tax year and identification number on the check
If you submit a check with your client's amended return, write the tax year and the taxpayer's Social Security Number, or the California corporation number on the check. Including this information streamlines the process of applying the payment to the correct taxpayer and year.
When you notify us of a federal audit examination, and avoid some of the errors that commonly occur, we are able to resolve your client's case without contacting you for further information. You can help prevent delays and ensure we resolve the case quickly.
Call one of these numbers if you need further assistance on IRS audits:
- Personal Income Tax (916) 845-4028
- Corporation Income Tax:
- Non-apportioning (916) 845-4028
- Apportioning and Combined Reporting (916) 845-6135